How to Avoid a Misvaluation

It amazes me how often clients ask to discuss the sale of their business and present me with a valuation prepared by their CPA.

What’s wrong with this? Surely your accountant, given their knowledge of your business and their accounting skills, should be the perfect person to valuate your business. However, based on the many valuation reports I have seen that were prepared by accountants, this is not the case.

Many of the accountant-produced valuation reports I have reviewed aren’t worth the paper they are printed on. In fact, most of the valuations that I have seen are simply calculations such as, net profit x 3 = market value, or worse, revenues x 3 = market value. These are not valuations.

Points of Interest

As a health care business broker and as an entrepreneur, I find that this kind of “valuation” practice has a profound negative effect. It sets expectations of sellers to unattainable levels, and it ultimately causes significant distress to sellers/owners. Here’s why you should never ask your accountant to value your business:

1. Accountants Are Not Business Brokers

I strongly believe that the most important knowledge a business valuator should have is a keen understanding of the ever-changing health care business marketplace, and accordingly strong knowledge about what prices that business buyers are willing and able to pay for certain types of businesses.

Most accountants rely on market comparables to base their valuation estimate. This is a significant mistake, as very few sale transactions are ever published. The transactions that are published are usually larger public companies. Additionally, these comparables often do not include consideration of discretionary and non-recurring expenses (addbacks), which can significantly impact market value.

I recently reviewed an accountant-produced valuation of a competitive bid-winning HME, with revenues of approximately $8 million, where the accountant determined the value at 2x revenue, plus the value of inventory. Worse yet, the accountant went on to say that if the business lost the competitive bid they would only be worth 1x revenue, plus the inventory. In my experience, I can assure you that such a business would never transact in the marketplace for anything close to the accountant’s valuation. Hence, the valuation report was a complete waste of money and effort.

Having an M&A advisor in conjunction with a valuator adds an additional reality check. Not only does the valuator have the advisor to lean on for closed-door comparables and market trends, but they put their money where their mouth is. In other words, it is easy to say that a company is worth a certain value. It is much harder to say that a company is worth “that” value, and here are offers to back it up. Therefore, you seldom see over-inflated valuations come out of firms that then have to sell the companies (hence prove their valuation).

2. This Is Not a Normal Accounting Function

Trust your accountant to do what he or she is good at doing, such as estimating your tax liabilities, producing financial statements, managing your inventory values, etc. Most accountants are specialists in taxation, not valuation. So, unless your accountant is a specialist in business valuations, you should engage someone else to value your business. Accordingly, I would never attempt to advise you on your taxes; it’s not what I do. Unfortunately, many accountants—eager for fee revenue—will take on engagements to complete business valuations, even though it is not their area of expertise and not something they do very often.

Regrettably, this means a great deal of the accountant-produced valuation reports I’ve seen clearly demonstrate that the accountants responsible for them don’t clearly understand the marketplace. Why waste your money?

3. The Accountant Is Not an Independent Advisor

Many business owners have had the same accountant for years. Given the relatively close relationship between clients and their accountants, accountants cease to be independent, arm’s length advisors, and instead become advocates for their clients. While this may work exceedingly well to the benefit of the clients in other accounting matters, it does not work well in the case of business valuations.

Additionally, often a valuation will mean the future loss of a client for the accountant, which can sometimes factor into the equation. When it comes to valuing your business, you should engage someone who is truly independent.

4. What Is Your Best Option?

I’ve found the best business valuations are produced by seasoned practitioners who specialize in completing valuations. These practitioners have specialized knowledge and expertise in the field of business valuations, meaning their advice is grounded in experience and logic. If you needed heart surgery, you wouldn’t use your primary care physician, you’d go to a specialist. The same applies to business valuations.

Your chosen valuators should also have a deep understanding of the current state of the health care marketplace. This means they should know how different businesses in different verticals are transacting in the marketplace, and on what prices and terms buyers and sellers are completing transactions. Understanding the health care marketplace is vital to producing logical and defendable valuations of health care companies that stand up in the face of current market conditions.

Further, it pays to know that there are many specialist business valuators in the market, who have unique expertise in valuing businesses within specific industries. For example, if you own a pharmacy, it would be prudent to engage a valuator who keenly understands the nuances of businesses in the pharmacy industry, and what impact these factors have on a business value.

At the end of the day, your company is worth what someone is willing to pay for it. Do you feel confident that your accountant has the knowledge to deliver that number to you?